The rebirth of Tool: Recent developments in entertainment liability coverage

The conventional wisdom is that commercial general liability (CGL) policies do not provide meaningful coverage for entertainment industry insureds with regard to much of their creative output. Indeed, coverage for intellectual property claims generally has been available in the CGL context only if the claims at issue arise out of an insured’s advertising activities, and, the scope of such coverage has continued to narrow with revisions to the standard-form CGL policy. Nonetheless, two recent cases have made it clear that there is still life left in advertising coverage provisions in this context.

The first is an opinion in an insurance dispute regarding the now-legendary litigation between Mattel and MGA Entertainment over Bratz. In February 2012, the Central District of California denied a motion for summary judgment filed by Crum & Forster Specialty Insurance Co. (C&F), which sought a determination that it had no obligation to defend MGA in the Bratz lawsuit. The C&F policies at issue provided coverage for advertising injury arising out of the “use of another’s advertising idea in [the insured’s] advertisement,” as well as the “[i]nfringement upon another’s copyright, trade dress or slogan in [the insured’s] advertisement.” The policies also contained, of relevance here, exclusions for advertising injury arising out of:

“The infringement of copyright, trade secret, or other intellectual property rights,” other than infringements in the insured’s advertising itself

Breach of contract

The district court held that Mattel’s claims triggered C&F’s duty to defend. Mattel alleged that MGA stole a host of advertising, marketing and promotional plans and strategies, and that MGA used these materials, although the complaint did not expressly allege that MGA did so in its advertising. Mattel also alleged that MGA infringed on a number of copyrights in works, the content of which was similarly unspecified. This was sufficient for the court, which held that the allegations satisfied both of the coverage clauses above.

Of particular note, the court held that, in order to satisfy the requirement that injury be caused by the insured’s advertising, it was sufficient that the allegations left open the potential that MGA used the materials in its advertising, even though Mattel never alleged that it had.

The court also held that the trade secret exclusion did not apply, since not all of the allegations concerning the theft of Mattel’s advertising applied to trade secrets. The court similarly held that the breach of contract exclusion did not apply, since not all of the claims arose from the breach of agreements with Mattel, and since the allegation of breach (as opposed to a finding of breach) was insufficient to trigger the exclusion.

The other noteworthy decision, issued in May 2012, stemmed from a dispute between the rock band Tool and an artist, Cameron De Leon, who claimed that Tool infringed on the copyrights in a variety of works that De Leon created for the band. The works were used on all sorts of Tool merchandise, on album covers, in videos and during concerts.

Tool was covered by the American Insurance Co. (AIC) under an entertainment insurance policy, which appears to have been a traditional CGL policy with (ironically) an entertainment industry exclusion (EIE) barring coverage for injuries “arising out of” any entertainment industry work, including the creation and distribution of music, musical recordings, etc. The trial court granted summary judgment for AIC, holding that the EIE barred any coverage for De Leon’s claims.

The California Court of Appeal reversed. Of particular interest, the court concluded that the EIE rendered coverage under the policy illusory, since it would bar coverage for any claim “incidentally related” to Tool’s music. AIC argued that coverage is not illusory where there is at least one conceivable claim that would be covered, an argument that the court rejected, in part because AIC’s example (a defamation claim by Tool’s former bassist against its current bassist, for remarks made on a private Twitter account) was one which the court concluded would still be excluded under AIC’s interpretation of the EIE. The court concluded that the EIE only properly excluded injury that resulted from the exploitation, distribution and exhibition of Tool’s music—not its merchandise.

The Mattel and Tool opinions clearly offer hope for the coverage of entertainment-related claims in the CGL context. The two decisions advanced, respectively, an expansive interpretation of advertising injury coverage, even without any actual advertising activity, and a correspondingly narrow interpretation of the EIE, which left open the possibility of coverage for claims that were ancillary to any creative output. Both were positive outcomes for entertainment insureds.